64 Million Empty Nests

— Are things so bad in the global economy that they’re good? Are the markets simply dismissing all the risks in the world because they think Ben Bernanke will launch into QE3 before QE2 officially ends?

— That’s the feeling we get. Loose monetary policy is not called ‘easy money’ for nothing. And the sharks, the short-term traders who make up the majority of trading volumes these days, smell the blood of easy money in the water.

— Too many people look at market prices these days and believe what they see. Prices are meant to convey information after all. But an economy or monetary system juiced up on easy money and excess liquidity tends to throw off weird price signals. Only in an economy operating on sound money principles can you have faith in what prices are trying to say.

— So in an unsound system, investors act like Pavlov’s Dog and expect more liquidity the worse the underlying fundamentals get. Even if the assumption of QE forever is right, those buying at these levels are going to get burnt.

— From a longer-term perspective – or dare we say – from an investor’s perspective, continuing QE will not be kind to share prices. Eventually we’ll see much higher inflation, which will lead to a sell-off in the bond market. In the years ahead, 10-year US Bond yields of 5–6 per cent, or higher, will not be out of the question. (That might not sound like much but in an economy with as much debt as the US has, it’s a lot).

— This increase in the ‘risk-free’ rate will push down the value and price of equities. In periods of high inflation, high government bond yields mean the market will trade on lower multiples. So instead of a market PE (price-to-earnings ratio) of, say, 15 being the norm, under a higher inflation scenario the market PE could drop to around 12 or lower.

— As an aside, in the high inflation 1970s many developed equity markets around the world bottomed out with an average PE of around 8 times or lower. For some perspective, a market that goes from a PE of 16 to 8, without any change in actual underlying earnings, falls by 50 per cent. High inflation is not necessarily good for the market, an outcome many now seem to be betting on.

— But that all assumes Ben keeps his finger on the button and continues to expand the Fed’s balance sheet. Is the market correct to expect more QE? Won’t the Fed want to give the market the impression (however fleeting) that they have some semblance of dignity and belief in free markets?

— We don’t like betting the Fed will do the right thing. We are contrarians though and right now the contrarian bet seems to suggest the Fed will hold off on more QE until the market tips over again.

— And we think it will. As our friend and colleague Murray Dawes (our resident trader) said yesterday in an email exchange, ‘This market is an accident waiting to happen’.

— After running our amateur technical eye over the chart of the ASX200, we’d concur with Murray’s thoughts. Check out the graph below. The recent rally looks like little more than a reflexive bounce from an oversold condition. Chase it at your own risk.

— In Australia, the focus is back on what constitutes a ‘fair share’ for our resources. The Greens are refusing to back the amended mining tax in the form negotiated by Labor and the big miners. Not surprisingly, they want to bring back the original, broader tax to make the world a better place.

— Don’t get us wrong, we’re all for making the world a better place. But that doesn’t happen via tax increases and giving it to politicians to distribute to marginal constituencies.

— Under the existing system, if you want better healthcare, go and live in a marginal electorate…and keep changing your vote.

— Speaking of voting, our thoughts go out to all NSW voters tomorrow. We hope your state-based democratic duty passes as quickly and painlessly as possible. At least all those nauseating ads will be over!

— For anyone who thinks that politicians can possibly do any good for an economy, check out this SBS Dateline program about China’s property boom. It’s incredible.

— It documents China’s housing boom and takes you on a tour of its empty cities. There’s a mind-boggling 64 million apartments sitting idle in China. Many of these are purchased as ‘investment properties’, despite having no rental yield. The analyst interviewed says the situation in China ‘will make the United States (property boom and bust) pale into comparison.’

— This is all because of central planners’ desire to generate GDP growth, whatever the consequence. The stupidity of all this would be hard to believe if not for the evidence. Command economies do not work. The longer China tries to inflate the property bubble, the bigger the bust will be. The laws of capitalism will soon deal the communists a very harsh lesson.

— And China’s bust will have a big impact on Australia’s economy. There’s a lot of iron ore and coal in those 64 million apartment blocks. We’re guessing our terms of trade wont be so favourable 12 months from now.

Greg Canavan
For Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

Leave a Reply

5 Comments on "64 Million Empty Nests"

Notify of
Sort by:   newest | oldest | most voted

Is this currency swaps liquidity again between reserves managing the Yen crisis (more hidden sovereign US borrowing)?



That program on SBS was absolutely terrifying for us

The daily reckoning has lots of devils advocate articles but Chinas trade deficit
coupled with 64 million empty apartments ( not to mention the infrastructure and roads and malls that
are empty) makes for compelling evidence of what is in store for the world


Maybe Central Planners in China can try something like the Aus Get-up Campaign to quell the property bubble:



They could call it say ’64 million Empty Nests are a Waste of Space Strike’


Don’t be terrified Rob & Bob. It’s _old_ news.
Great you were able to have your Two Bob’s Worth, anyway… . :D


even if there is a boom bust in China, theres still, along with the Indias and Brazil etc, a heck of a lot of people managing to climb up to the middle class rungs of the ladder. that is a force that will only stop when nature says “no more”. so there will be growth* at any costs, including nuke plants in Indonesia etc. that more than makes up for the costs of the shennanigans. just my 2 cents worth, GST free.

* and the sort of unsustainable growth that requires raw materials, rather than 100% recycling.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au